Establishing Credit

It is a truism for consumers and startups: it is much easier to get credit when you do not need it. Having access to extra money at critical times can be what keeps you afloat in the difficult early days of your startup. That is why it makes sense to find out how to establish credit for your new business and how to keep it strong.

Steps To Establishing Your Credit Worthiness

Businesses and consumers both need to look like excellent credit risks to banks, credit unions, credit reporting agencies, and credit card companies if they want to establish and keep their credit.

Here is a look at four steps to take towards building a creditworthy reputation.

  1. Keep an eye on you own credit rating, as well as the one for your business. Many banks look at a businessperson’s credit rating first. If it is in the mid-600s or higher, you are considered a good risk. One of the best ways to keep that rating high is to have a low ratio of debt to credit on your credit cards and any credit lines you have available.

    Keep balances less than 30% of your credit card limit. Inquire about the personal credit rating of investors you are considering for your business. Lenders will likely look at those too.

  2. Get credit before you are desperate. Apply for any credit, even small amounts, as soon as you get into business. Most startups need a two-year track record before a bank will lend a substantial sum. However, smaller amounts, in the form of a business credit card, credit line from a credit union, or small bank loan, are entirely feasible early in the life of your business.
  3. Use your credit regularly and wisely. Your goal is to build an admirable credit history. You can accomplish that by using your credit often and paying it off quickly. In addition, even if you need to pay a fee, look into setting up a Dun & Bradstreet profile.
  4. Do business with one lender. Business and money are all about relationships. Get to know the lenders and managers at your bank and credit union. Keep them in the loop. Let them get a chance to see you in action and watch you new company grow.

Identify Lenders and Sources

Banks and credit unions are the most prominent places to get credit. Don’t automatically apply to the closest one. Look for one with a reputation for being friendly to small businesses. Ask other startups where they obtain credit. If a creditor gives credit to one startup, there is a good chance it will give it to you.

Ask other startups about which credit cards are the easiest to get. Apply for a business card as soon as possible. Don’t worry about the limit, the goal is simply to get the card. Use it often and pay off the balance in full each month.

Unique and Creative Ways To Get Credit

Don’t let a turndown from one lender stop your efforts to get credit for your startup. There are many ways available. Using alternative credit sources does not harm your chances of eventually getting credit from a bank or credit union. In fact, it can improve it when they see you handle your money well and pay back balances on time.

Here is a short list of other sources of credit.

  • Investors
  • Asset-based lenders, who base their decisions on collateral instead of credit scores
  • Peer-to-peer lending
  • Crowdfunding like Prosper, Kickstarter, and Indigo. Of course, these are not exactly extensions of credit, but the money you get helps with bills and using it wisely shows lenders that you are a good risk.
  • Suppliers who regularly report to credit agencies

It pays to spend time working on your personal and business credit. Having strong business credit can position your startup more favorably for payment terms with suppliers and vendors, and let you enjoy better interest rates and terms from banks, credit unions, and other lenders. Remember, once you have established good personal and business credit, be sure to monitor and safeguard it.

Information presented in the Northwest Financial Wellness Center is provided for educational purposes only and is not related to actual Northwest products or services. Northwest makes no representations as to the accuracy, completeness or specific suitability of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Northwest recommends you consult a professional for any specific guidance you are seeking.